Common Ownership along the Supply Chain and Corporate Earnings Management
48 Pages Posted: 29 Mar 2022 Last revised: 30 Mar 2022
Date Written: March 30, 2022
Abstract
This study investigates the relation between common institutional ownership along the supply chain and earnings management by supplier firms. Using a sample of U.S. publicly traded firms for the period of 1980–2016, we find that common ownership along the supply chain reduces the level of a supplier’s discretionary accruals, suggesting that it discourages the supplier firm from engaging in upward earnings management via manipulation of discretionary accruals. This effect is more pronounced for firms with greater relationship-specific investments, lower information transparency, and higher levels of product market threat. We further find that common ownership also reduces the extent to which the supplier firm engages in real earnings management. The above findings are robust to potential endogeneity checks. Overall, our results suggest that common institutional ownership along the supply chain plays a significant role in curbing opportunistic earnings management, both accrual-based and real, by the supplier firm.
Keywords: Supply Chain; Common Institutional Ownership; Earnings Management; Institutional Investors.
JEL Classification: M40; G23; G32.
Suggested Citation: Suggested Citation